Unemployment declining in the Netherlands; government finally running a budget surplus

The Dutch economy will grow by 2.2 per cent in 2017 and 1.9 per cent in 2018

International uncertainties appear to be waning, which helps exports

Investment in housing and household consumption will be strong drivers of growth, especially this year

The government had a budget surplus in 2016 for the first time in eight years

More and more Dutch people are finding work, and unemployment is falling sharply

Introduction

The volume of the Dutch economy grew by 2.2 per cent last year, the largest increase since 2007. We expect to see growth of 2.2 per cent again this year (see table 1). This will be more or less equally divided between exports and domestic consumption (see figure 1). The export sector continues to do well despite international uncertainties, and it is notable that housing investment will continue to increase strongly this year as a result of the still strongly recovering housing market.

Despite a fall in household consumption in the first quarter, we also expect private consumption this year to make the biggest contribution to growth since the crisis in 2008, driven by higher disposable income and high levels of household confidence. Growth will ease slightly in 2018 to 1.9 per cent, mainly due to lower increases in housing investment and private consumption.

The Dutch job machine is currently running at full strength, which can be seen in the strong rise in employment. We therefore expect unemployment to fall further, to 4.5 per cent on average in 2018. At the same time, inflation is rising. This year, the increase will come mainly from higher energy and fuel prices. Next year, we expect the Dutch economy to reach its potential, which will drive prices higher. The fact that the Dutch economy will reach its potential next year also means that the years of high catch-up growth will be behind us: after 2018 we expect to see a structural level of GDP growth of around 1.2 per cent.[1]

International uncertainties wane; exports rise

When the British announced last summer that they want to break-up with the European Union and American voters elected protectionist Donald Trump as president a couple of months later, the shock to the rest of the world was immense: would this wave of anti-establishment voting engulf the Netherlands, France and Germany as well?

So far, the people in these three countries have voted for continuity and moderation. In the Netherlands, Prime Minister Mark Rutte was given the chance to form another cabinet in the lower house elections in March. Six weeks later, Marine Le Pen’s eurosceptic Front National failed to win the French presidency, losing to globalist Emmanuel Macron. On the day he was sworn in, a couple of hundred kilometres away German Chancellor Angela Merkel’s party won the elections in North-Rhine Westphalia and Schleswig-Holstein. Her party had also previously been victorious in Saarland. Merkel thus seems to have a good chance of being elected as Chancellor for a fourth time in September.

And certainly little can be seen of international uncertainties in Dutch export figures: last quarter was the fifteenth consecutive quarter of growth in the volume of Dutch exports of goods and services. Exports in the first three months of 2017 were up 0.9 percent compared to the last quarter of 2016, meaning that the export sector has made a stronger start in 2017 than we previously expected. We therefore expect international trade to make a strong contribution to GDP growth this year and next year (see table 1). This is in line with the slightly better outlook for major trading partners such as Germany and France (see our ‘Global Economic Outlook’).

Dutch exports are however not expected to match the rapid growth seen in the years before the economic crisis. This is because while the uncertainties have eased, they have not entirely disappeared. The Brexit negotiations could still drive a serious wedge between the European Union (EU) and the United Kingdom, which is the Netherlands’ third most important trading partner in terms of added value. Economic growth in the UK is expected to slow somewhat this year. The erratic policy of President Trump in the United States could also put Dutch exports under pressure.

First budget surplus since the crisis

After the failed attempt to form an administration by the VVD, CDA, D66 and GroenLinks in early May, a new cabinet and new policies appear to still be a long way off. But the new administration is expected to start with a much better financial position: in 2016, the government had a budget surplus of more than EUR 2.9 billion, 0.4 per cent of Dutch GDP. This is the first time since 2008 that the State’s revenue has been larger than its spending, and just the fifth time that this has happened this century (see figure 2).

Although the government spent more on civil service salaries, health care costs and the state retirement pension (AOW), the improving labour market and higher corporate earnings generated more income for the exchequer through income tax and social insurance contributions. The government thus has a somewhat more favourable financial position than we had foreseen last quarter.

Figure 2: Government has a surplusSource: Statistics Netherlands (CBS)Figure 3: Nearly at the European normSource: Statistics Netherlands (CBS)

Dutch government debt has also fallen, from 65.2 percent of GDP in 2015 to 62.3 per cent in 2016 (see figure 3). This is partly because the economy is larger than it was a year earlier, and partly due to repayments by the State out of the proceeds of the sale of (parts of) ABN AMRO, insurer ASR and real estate company Propertize. In absolute terms, Dutch government debt amounted to EUR 434 billion at year-end 2016, 7 billion less than in 2015.

Public debt is nevertheless still much higher than in 2007, before the economic crisis. In that year, government debt was ‘only’ EUR 262 billion, slightly less than 43 percent of GDP. Dutch debt is also still above the European target of 60 percent, although we do expect the government finances to improve further in the coming quarters. While spending on health care, education and AOW benefits will increase this year, the higher level of employment will mean that government has to spend less on unemployment benefit and at the same time it will receive more revenue from income tax and social insurance contributions.

With no change in policy, the government surplus is therefore expected to rise further in the coming years, while it’s expected that government debt will fall below 60 percent of GDP this year. Hopefully a future cabinet will not use this financial room for giveaways, but will invest in the growth potential of the Netherlands.

Consumer keeps spending

In April, consumer confidence reached its highest level since 2001, and in May consumers remained optimistic as well (see figure 3). This fits with the increase in disposable household income generated by the improvement in the labour market and slightly higher wages. We had expected households to ramp up spending at the beginning of the year, but this failed to materialise: consumption last quarter was down 0.1 of a percentage point on the quarter before.

We expect household consumption to pick up again in the coming quarters and that private consumption will contribute significantly to economic growth this year. In addition to the high level of confidence, disposable household income is rising due to the increasing number of jobs and the increase in real wages. We expect to see private consumption grow by 1.9% this year and then ease slightly to 1.7% in 2018.

The development of disposable income in the long run is still a cause for concern. Many Dutch people experienced a large drop in income during the economic crisis, and now incomes have been rising only modestly for a longer period, despite the fact that unemployment is falling rapidly. The growth of wages has actually slowed down considerably in recent months compared to a year earlier. To some extent, this could be because the Dutch labour market is larger than the unemployment figures imply, as is also the case in other European countries. Both the development of disposable income and the functioning of the Dutch labour market would benefit from reducing the tax wedge between net wages and employers’ labour costs.

Demand for people grows

Last quarter, businesses and governments advertised 13,000 additional vacancies compared to the previous quarter, the largest increase since 2006. This is symptomatic of the quick rate at which employment has been rising in the Netherlands: there are 54,000 more workers in the first three months of the year. Compared to the first quarter of 2016, there are now 183,000 more people holding down a job. The commercial services sector, which includes temporary employment agencies, continues to make the largest contribution to jobs growth. But more people are also now working in construction. Noteworthy, given that in the crisis tens of thousands of jobs were lost in this sector.

Unemployment dropped to 5.2 percent on average in the first quarter of 2017, compared to 6.5 percent a year earlier (see figure 6). This rapid increase in the labour market also means that people who have been looking for work for more than a year are getting more successful in their job hunt: the group of long-term unemployed shrank by 12,000 last quarter. Contrary to a few years ago, long-term unemployment is now in a similar downward trend as short-term unemployment. The number of people looking for work for more than a year is still much higher than it was before the crisis, though (see figure 7).

But given the economic recovery and the increased number of job openings, we expect unemployment to fall further to 5.0 percent in 2017 on average and to 4.5 percent in 2018. Hopefully this will also offer the prospect of paid work to the group of people who have been without a job for a while. Increasing employment should also lead to higher household consumption, as people with a job have a higher income than those who are unemployed.

One should not expect wages to increase sharply as a result of the decline in unemployment though. While unemployment is falling rapidly, there were still around 2.7 job seekers for each vacancy in the first quarter of 2017. This is more than in the tight labour market immediately before the crisis, when there was more than one job seeker less for each vacancy. Furthermore, according to CBS there are still 486,000 people who have a job but would like to work more hours. This means there is still some room in the labour market, which will mitigate the upward pressure on wages. The same applies in several European countries.

Fuller working week

The fact that demand for labour is increasing in the Netherlands can be seen in the number of hours people work: in the first quarter of 2017 there were 2 percent more Dutch people with a full-time job than a year earlier, and among part-time workers the number of those working more hours is growing rapidly. There are 88,000 more people working part-time since the first quarter of 2016, and as many as 95 percent of them are working more than 20 hours a week.

This is partly due to the higher number of men that take on part-time jobs. In 2006, slightly less than 21 percent of men worked part-time. 10 years later, this figure was 26 percent. How much this is due to the economy, or to social and cultural changes (such as more men taking a day off to look after their children) is not clear. Compared to 2006, women on have a fuller working week on average, although the number of women with a full-time job in 2016 was just as little as ten years earlier: 25.3 percent in 2016 compared to 25.9 in 2006 (see figure 10).

It is although notable that the trend of temporary, non-fixed jobs is still ongoing. While the free fall of the number of employees with a fixed labour contract seems halted, still more than 90 percent of the people that have joined the workforce between the first quarters of 2016 and 2017 are either temporary employees, have a six-month or one-year contract or are self-employed (see figure 9). The proportion of these flexible workers in the labour market as a whole has increased during the same period from 37.9 percent to 39.1 percent.

Unless a new cabinet decides to change course, for example by easing legislation governing the right to dismiss employees or tackling the in the Netherlands lengthy time employers have to pay employees sick pay, flexible working will probably continue to play an important role in the years to come.

Figure 10: Men more often in part-time; women still barely full-timeSource: Statistics Netherlands (CBS), processed by Rabobank